Capital Insights with Jack Kern: State Sponsored Free Rent

Jack Kern
According to RealtyTrac and some other sources tracking foreclosure activity, approximately 280,000 foreclosure filings occurred in October, up about 5% from the prior month, but up almost 25% year over year. Foreclosures were probably accelerating at a more rapid pace than these numbers might suggest because many states enacted measures to slow or change the process, thereby skewing the resulting counts. To give you an example, those fun loving legislators in Colorado lengthened the process from 45-60 days to 110-125 days, and New York, historically not a huge foreclosure problem compared to other states, now requires that subprime mortgagees be given 90 days notice in advance of initiating a foreclosure action. I can only imagine the confusion that one is going to cause.

In Massachusetts, homeowners, (and presumably everyone else) get a 90 day right to correct letter before the foreclosure filings fly and in Maryland, a 45 day notice period is now in effect. This essentially guarantees that what was, for the most part, an orderly process is now so state and federally regulated that it will be hard to judge what the future holds.

Now there's a challenge for you. So let me take a shot at this.

In the beginning, foreclosures ticked up because the speculator/investors were simply walking away from deals they couldn't flip, and the financing was never going to be make sense if the properties were rented out.

Next, homeowners who had mortgage resets and changes in interest rate terms (negative amortization in the mix) found that they simply couldn't make the terms work and so they left after the foreclosure process was completed and the home changed hands.

Now, we're probably seeing a mix of phenomena, where people who have mortgage balances that exceed their primary residence's investment value by a wide margin are just walking away from their mortgages and in some instances, before their credit gets nicked, buying a similar, but much less expensive house in the same neighborhood. In other instances, as a practical consideration they do leave and rent too.

With the Feds now allowing a grace period of sorts and the states slowly enacting these notice provisions, we now have state sponsored free rent. And that bothers me. There are many instances where someone who owned a residence rented it out and pocketed the revenue, without passing along the payments to the mortgage holder. They then used these funds for other purposes, including buying another residence. Allowing this additional time period isn't going to make the problem any easier. We now have banks that want to, despite protestations to the contrary, just write down the loans, take the house and get it off their books. This additional time period has a real cost to it, reduces the anticipated future value of the MBS stack and makes the process more uncertain than ever.

I'm all for helping people, but honestly, people heading towards foreclosure knew it far enough in advance that giving them additional notice is cruel and provides false hope. Let's work to accelerate these foreclosures and just get through it, so that 2009 and 2010 can be better years for the industry.